Set for a re-rating?

POUND WISE

Dec 31, 2004 Dec 31, 2003% change Net sales34214.0223756.2644.02 Other income267.7309.91-13.62 Operating profit17797.8213412.2532.7 OPM (%)52.0256.46- Net profit9185.396678.0737.55 NPM (%)26.8528.11- EPS (Rs)64.4246.83- Trailing 12-month P/E10.82  In the first nine months of FY05, the company clocked sales of Rs 34,214 crore against Rs 23,756 crore in the same period the previous year, a 44.02 per cent jump.  The prices of benchmark crude, Bonny-light increased from an average $29 per barrel in Q3FY04 to $44.5 in Q3FY05. About 60 per cent of ONGC's revenues come from crude sales, 25 per cent from natural gas and the rest from other petro products.  While rising crude prices will mean more realisation, the worry is that subsidy losses could depress profits. In the first three quarters, the company has foot a subsidy bill of Rs 3114 crore compared to Rs 1536 crore for the same period the previous year.  However, rising crude prices will always result in net gains for ONGC because its crude oil sales are more than the total sales of LPG and kerosene - the two petro products which are subsidised.  There are also other things going in favour of ONGC. The company's global acquisition strategy and the consolidation in the oil sector will unlock a lot more value. Currently, it holds stakes in pure refining company Mangalore Refineries and Petrochemicals, Gas Authority of India and IOC.  With or without consolidation, the company intends to spread its presence in retail. It has started its roll out with one retail oil pump near Mangalore and aims to have about 10 by the end of the year.  And then, being among the most profitable public sector companies, the possibility of hefty dividend pay-outs cannot be ruled out. Last year, the company paid out a dividend of 240 per cent. This year could be no different.  Another plus is gas price de-regulation. The government's efforts to deregulate natural gas prices by allowing the operators of Panna, Mukta and Tapti (PMT) fields to sell gas at market determined prices will benefit ONGC as the current market price is significantly above the administered price of $2 per mBtu (million British thermal unit).  Based on assumptions on crude prices, the earnings estimate could vary from Rs 95 (at pessimistic crude price of $30) to Rs 140 (at $50) after accounting for zero to Rs 4000 crore of subsidy losses at the two price levels. Going with oil at $50 and the current price of ONGC at Rs 847.75, the stock trades at a P/E ratio of 10.82 times.  More than just earnings, the revaluation of ONGC's oil assets at the new price band of around $50 will mean a compelling reason to re-rate the stock.